Judgement

Appeal (No. 16 of 1938) from a judgment of the High Court at Madras (April 29, 1937) upon a reference made under s. 66, sub-s. 2, of the Indian Income-tax Act, 1922.

The reference related to an assessment to income-tax made upon the respondent, Diwan Bahadur S. L. Mathias, for the year 1934-5 in respect of (inter alia) profits arising to him from a coffee business. The main question arising in the appeal was whether the net sale proceeds of coffee grown by the respondent on coffee estates belonging to him outside British India, but sold within British India, were income, profits or gains arising or accruing or received within British India so as to be liable to income-tax under s. 4 of the Indian Income-tax Act, 1922, as amended by s. 2 of the Indian Income-tax (Amendment) Act, 1933, or whether the income in question was exempt from tax under the second proviso to sub-s. 2 of s. 4 as being income from agriculture arising or accruing in a State in India within the meaning of that proviso.

The question referred was " Whether any part of the "income derived by the petitioner from the produce of his "coffee estates in Mysore is exempt from taxation under the "second proviso to s. 4, sub-s. 2, of the Indian Income-tax "Act as being income that has accrued or arisen outside "British India."

The facts, and the relevant provisions of the Indian Income-tax Act, 1922, as amended, appear from the judgment of the Judicial Committee.

The High Court (Beasley C.J., Varadachariar and King JJ.) answered the question adversely to the appellant. The judgment is reported at I. L. R. [ 1938] M. 25.

1938. Oct. 27, 28. J. M. Tucker K.C. and Hubert Hull for the appellant. The coffee is grown outside British India and sold in British India, and the question is whether the respondent is liable to pay income-tax on the whole of the profits arising from that business, or, if not, on any and what part. The High Court at Calcutta have held in similar circumstances (In re Mohanpur Tea Co., Ld, (I. L. R. [ 1937] 2C. 201.)) that he would be liable to pay tax on the whole of his profits. In the present case the High Court at Madras have held that he is not liable to pay any tax ; that the land being in a State in India outside British India, and in respect of which an annual payment is in fact made to that State, the second proviso to sub-s. 2 of s. 4 of the Indian Income-tax Act, 1922, exempts the profits of the particular business in this case. It is contended, however, that that proviso is limited to sub-s. 2 of s. 4, and that this income is caught under sub-s. 1 of s. 4, and that there is no need to attempt to make it taxable by the application of sub-s. 2 at all. With regard to sub-s. 3 of s. 4, there is a definition of " agricultural income " in s. 2 ; this is not land which falls within that definition. The respondents income is not agricultural income as defined in the Act, and is not agricultural income within the meaning of the exemption in the Act. Although it may be income from agriculture, it is none the less income—profits and gains—of a business.

Reginald Hills for the respondent (interposing). For the respondent it is submitted that it is agricultural income within the meaning of the particular exemption in the second proviso to sub-s. 2 of s. 4.

J. M. Tucker K.C. It is agreed that it is income from agriculture within the meaning of the second proviso to sub-s. 2 of s. 4, and that if sub-s. 2 has to be relied on to make this income taxable then the second proviso exempts it. But it is submitted that that is simply an exemption from anything in sub-s. 2, and not from anything in sub-s. 1 of s. 4. The short point is, does it come under sub-s. 1 of s. 4, and

Law. Rep. 66 Ind. App. 23 ( 1938- 1939) C ommnr. of I.T. Madras v. Diwan Bahadur S. L. Mathias

167

if it does, does the second proviso to sub-s. 2 exempt it ? If it is held against the appellant that the profits arose or accrued outside British India, then the question still remains